By Olivia Drexler, ERS Intern
Inventory is an Investment
The most productive retail businesses understand that inventory is an investment. Inventory is money, but only when it is generating sales. Oftentimes, businesses find themselves in a position where there’s not enough cash to buy more inventory- they have no “open to buy”. It becomes necessary to look at current inventory to determine what opportunities exist to free up capital. Businesses intent on improving inventory productivity continually look equally at top sellers and slow turning items. They have a discipline and repertoire of reporting that dissects and evaluates the health of their inventory. More importantly, they put a plan of action in place to increase the velocity of slow sellers. Other actions may include returning or exchanging product to vendors or selling them to the off-price tier.
Categorize your inventory: Good, Bad, and Ugly
Begin dissecting your inventory by categorizing items. Weeks of supply (WOS, inventory/rate of sale) is a good benchmark to use. High WOS is usually not a good thing, and low WOS could be good or bad depending on the situation. If an item is continuing, low WOS means you could run out- a bad thing. However, low WOS is a good thing if it is marked down. Group items into tiers- low stock, healthy, surplus and extreme surplus. Then based on each item’s situation, categorize into more understandable groups- good, moderate, bad, and terrible. Items are now prioritized for action. Focus your energy on “terrible” inventory first and analyze each item. They could have been bulk buys, and high WOS is acceptable. Was demand forecasted higher and it didn’t happen? Perhaps a competitor is winning on price, or it’s an unpopular color or size. Either way, take action to increase turnover.
Make a Plan to Take Action
Identifying your “terrible” inventory is only the first step. Far more important is acting. Your options may be limited, and they depend on how your business operates. The most obvious action is to markdown the worst selling items. Look at your POS history to see how deep markdowns need to be taken- being sensitive to cost. Can items be returned or exchanged to the vendor? Another option could be to transfer items between locations. It is possible that particular sizes or colors are more popular in certain locations, so shifting those sizes or colors to a location where they sell best makes sense. Florida, for example, is incredibly diverse and a store in the Miami community will likely have different style preferences than one in Naples. Transfers could be costly though, so you need to determine what level of margin you can live with.
The same way an investor monitors their portfolio of stocks and bonds, monitoring your inventory health helps you understand the state of your capital invested in product. ERS offers a variety of reporting and tools to help improve inventory productivity.